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Altia, A Spanish Small-Cap Opportunity

  • Quantitative analysis, with ROA around 10% and Debt/EBIT at 1.5, indicates a healthy and profitable business model.
  • Qualitative analysis proves that Altia has some qualities that reinforce its competitive advantage in form of switching costs.
  • The CEO owns around 80% of the company while Ram Bhavnani, a well-known Indian millionaire in Spain, has recently bought 5% of Altia. This ensures the management-investor alignment.

Altia defines itself as a consulting & IT services company. This sector could seem unattractive at first sight but, after some digging, we can find several interesting facts that will attract our attention to a company like this one.

To begin with, the size of Altia, although it is still a small-cap, allows the company to reach first-class clients like Inditex, PSA Peugeot Citroën, Renault, Telefónica and several public administrations (also European institutions like OHMI) while a bunch of smaller competitors which are barely visible and - of course - not listed in any exchange can do little or nothing and have to acquiesce to the leftovers. Besides, after some years of crisis in which these smaller competitors struggled to survive, Altia took advantage of the cheap market to pursue some profitable acquisitions which have allowed the company to propel its sales and net profit spectacularly during these tough years:

Main figures of Altia since 2009

For those unwillingly to analyze any tech or IT company, remember Pat Dorsey's words in "The little book that builds wealth": The dangerous businesses are those producing technology, those must face that fierce competition. The companies which are users of technology, in turn, are happy to see how hardware is cheaper and cheaper while it becomes faster, lighter and more accurate over time. Altia is not producing technology but selling services thanks to technology, so we should mark this point as a positive one.

Besides, the switching costs of this industry are the keystone to ensure that sales of previous years will remain, at least, stable. Although there is no network effect involved in this segment of business, a big retail, banking or automotive company will find hard to move their websites, rent new servers, take down cloud services and risking a longer-than-acceptable down time in their logistics or internal communications. This means that reasons to switch to another IT provider have to be more than a slight price increase so that the change is worth. Add the proprietary software that Altia owns and offer to their clients and this competitive advantage will be reinforced even more.

A quick look at the P/E does not show the potential of this company. €2.982.709 divided by 6.878.000 shares gives an EPS of €0.43. Taking into account today's share price, €7.82, we have a P/E of 18 (with 2013 earnings). However, such a P/E can be considered a bargain when future estimations are taken into account.

But we need to believe their estimations in order to use them and project a future stock price so, before heading into the future, let's check how conservative their past estimates were:

2010 expectations vs Real figures (EUR in million) 2010e 2010 real
Sales 17.80 17.65
EBIT 1.61 2.41
Net earnings 1.11 1.68

Yes, earnings went north 50% more than expected by the management... the year that Altia was listed in the Spanish Exchange, precisely when they could have bragged a bit and try to raise more cash. It seems they deserve some credit. (Source: 2010 Annual Report, page 97)

2012 expectations vs Real figures (EUR in million) 2012e 2012 real
Sales 21.97 28.34
EBIT 3.07 3.64
Net earnings 2.15 2.49

Once again, the same story was repeated in 2012. (Source: 2012 Annual Report, page 108)

So... ¿what are the expectations of the management for the foreseeable future?

2014 and 2015 expectations 2014e 2015e
Sales 49.41 55.94
EBIT 4.87 7.97
Net earnings 3.25 5.03

If the management is still able to make reasonable and conservative predictions, the EPS for 2014 and 2015 would be €0.47 and €0.73 respectively. For the time being, 40% of the expectations for 2014 were met during the first semester, traditionally weaker than the second one. (Source: 2014 1st semester report, page 109)

Applying a standard P/E of 15 and assuming that the company will not grow from 2015 onwards (let's be conservative, no more grow and no more P/E above 20, as seen in the past), we would see a rise in the stock price until €11, which means that it will grow at a 18.6% annually during the next two years.

Given the facts, does a 18.6% annual performance give you a margin of safety wide enough?